Delivery of Equivalent Securities - GMSLA Provision

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2010 Global Master Securities Lending Agreement
A Jolly Contrarian owner’s manual

Clause 8 in a Nutshell
Use at your own risk, campers!

8. Delivery of Equivalent Securities
8.1: Lender’s right to terminate a Loan: Unless it is a term Loan, Lender may terminate a Loan and call for Equivalent Securities by giving notice on any Business Day. Lender must allow the Borrower at least the standard settlement cycle to return Equivalent Securities.
8.2 Borrower’s right to terminate a Loan: The Borrower may terminate a Loan at any time and deliver outstanding Equivalent Securities to Lender per its instructions. The Lender must accept such delivery.
8.3 Delivery of Equivalent Securities on termination of a Loan: On termination of the Loan, Borrower will Deliver Equivalent Securities to Lender in accordance with the terms of the Loan.
8.4 Delivery of Equivalent Collateral on termination of a Loan: At the point where Borrower is obliged to deliver Equivalent Securities to Lender on termination of a Loan, Lender must simultaneously deliver to Borrower Equivalent Collateral orCash Collateral relating to the Loan.
8.5 Delivery of Letters of Credit: Where Collateral takes the form of a Letter of Credit, the Lender can satisfy its obligation to redeliver Equivalent Collateral by delivering the Letter of Credit for cancellation, or consenting to a reduction in its value.
8.6 Delivery obligations to be reciprocal: Neither Party has to pay or deliver anything unless it is satisfied that the other Party will make the corresponding payment or delivery to it. If it is not, as long as it is willing and able to perform its own obligations it may, by notice to the other Party, withhold delivery or payment until the other Party has made sufficient arrangements to assure full delivery or payment.
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Clause 8 in full


8. Delivery of Equivalent Securities
8.1 Lender’s right to terminate a Loan
Subject to paragraph 11 and the terms of the relevant Loan, Lender shall be entitled to terminate a Loan and to call for the delivery of all or any Equivalent Securities at any time by giving notice on any Business Day of not less than the standard settlement time for such Equivalent Securities on the exchange or in the clearing organisation through which the Loaned Securities were originally delivered. Borrower shall deliver such Equivalent Securities not later than the expiry of such notice in accordance with Lender’s instructions.
8.2 Borrower’s right to terminate a Loan
Subject to the terms of the relevant Loan, Borrower shall be entitled at any time to terminate a Loan and to deliver all and any Equivalent Securities due and outstanding to Lender in accordance with Lender’s instructions and Lender shall accept such delivery.
8.3 Delivery of Equivalent Securities on termination of a Loan
Borrower shall procure the Delivery of Equivalent Securities to Lender or deliver Equivalent Securities in accordance with this Agreement and the terms of the relevant Loan on termination of the Loan. For the avoidance of doubt any reference in this Agreement or in any other agreement or communication between the Parties (howsoever expressed) to an obligation to deliver or account for or act in relation to Loaned Securities shall accordingly be construed as a reference to an obligation to deliver or account for or act in relation to Equivalent Securities.
8.4 Delivery of Equivalent Collateral on termination of a Loan
On the date and time that Equivalent Securities are required to be delivered by Borrower on the termination of a Loan, Lender shall simultaneously (subject to paragraph 5.4 if applicable) repay to Borrower any Cash Collateral or, as the case may be, deliver Collateral equivalent to the Collateral provided by Borrower pursuant to paragraph 5 in respect of such Loan. For the avoidance of doubt any reference in this Agreement or in any other agreement or communication between the Parties (however expressed) to an obligation to deliver or account for or act in relation to Collateral shall accordingly be construed as a reference to an obligation to deliver or account for or act in relation to Equivalent Collateral.
8.5 Delivery of Letters of Credit
Where a Letter of Credit is provided by way of Collateral, the obligation to deliver Equivalent Collateral is satisfied by Lender delivering for cancellation the Letter of Credit so provided, or where the Letter of Credit is provided in respect of more than one Loan, by Lender consenting to a reduction in the value of the Letter of Credit.
8.6 Delivery obligations to be reciprocal
Neither Party shall be obliged to make delivery (or make a payment as the case may be) to the other unless it is satisfied that the other Party will make such delivery (or make an appropriate payment as the case may be) to it. If it is not so satisfied (whether because an Event of Default has occurred in respect of the other Party or otherwise) it shall notify the other Party and unless that other Party has made arrangements which are sufficient to assure full delivery (or the appropriate payment as the case may be) to the notifying Party, the notifying Party shall (provided it is itself in a position, and willing, to perform its own obligations) be entitled to withhold delivery (or payment, as the case may be) to the other Party until such arrangements to assure full delivery (or the appropriate payment as the case may be) are made.
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Related agreements and comparisons

Related agreements: Click here for the same clause in the 2018 Pledge GMSLA
Comparison: Click to compare the 2010 GMSLA and 2018 Pledge GMSLA versions of this clause.

Resources and navigation

2010 GMSLA: Full wikitext · Nutshell wikitext | GMLSA legal code
Pledge GMSLA: Hard copy (ISLA) · Full wikitext · Nutshell wikitext |
1995 OSLA: Full wikitext · Nutshell wikitext | GMSLA Netting
Let me Google that for you: Guide to equity finance | ISLA’s guide to securities lending for regulators and policy makers
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Content and comparisons

8. Delivery of Equivalent Securities
8.1 Lender’s right to terminate a Loan
8.2 Borrower’s right to terminate a Loan
8.3 Delivery of Equivalent Securities on termination of a Loan
8.4 Delivery of Equivalent Collateral on termination of a Loan
8.5 Delivery of Letters of Credit
8.6 Delivery obligations to be reciprocal

Differences

Observers will note: in the 2018 Pledge GMSLA there is no equivalent of the 2010 GMSLA’s Paragraph 8.5 dealing with what to do with Letters of Credit, and no equivalent of the 2010 GMSLA’s Paragraph 8.6 requiring the delivery obligations to be reciprocal.

Instead, we assume to bulk out a paragraph which otherwise seems a bit textually anaemic, when drafting paragraph 8 of the 2018 Pledge GMSLA ISLA’s crack drafting squad™ went to town adding a couple of new paragraphs — 8.3 and 8.4 — that boast quite some textual complexity, twice purporting to avoid some doubt which, had these paragraphs not been added, wouldn’t be there — but boast a lot less forensic interest.
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Summary

Term

Unless you’ve agreed it has some kind of term, Loans are callable at will by either party.

You do see term loans in certain cases: “pre-borrows”, where an aspiring short seller is expecting a stock to go illiquid and wants to have the security ready to sell when everyone is scrabbling around trying to find enough of the stuff to sell short, thereby avoiding buy-ins and so on — and also in agent lending world, where Borrowers will want some medium term commitment (90 days or so) for trades where they upgrade their prime brokerage and margin loan inventory into high-credit quality assets they can give back to their own treasury departments. financial reporting rules may require these trades to have a minimum remaining tenor to get appropriate RWA treatment.

Equivalent

What if the Securities have been cancelled, redeemed, or converted into something else? The elaborately defined adjective Equivalent does a lot of work here.

But what if the issuer has gone bust? Here there may be little or no liquidity in the shares — they may well have been delisted, for example.

Look here to the mini-closeout provisions, which are designed to cope with exactly this kind of settlement failure.

And a letter of credit is

An old fashioned form of credit support. A bank writes an unconditional letter promising to pay a (usually large) sum on money on demand and without argument to a third party on behalf of a client. This gets small companies a bit of breathing space with trade creditors. Banks charge through the nose for them: they are a form of committed funding.

Lots of formal rules and legal form-obeisance. In any case, not a common way of collateralising a stock loan — done away with entirely in the 2018 Pledge GMSLA but hey — you never know.

Reciprocal obligations — the stock lender’s Section 2(a)(iii)?

This provision allows a Counterparty to suspend payments or deliveries pending satisfactory arrangements where it is concerned as to the creditworthiness of its counterparty. It is a half-arsed version of the ISDA Master Agreement’s feted Section 2(a)(iii).

Otherwise a creditworthy Borrower would be obliged to redeliver Equivalent Securities to a bankrupt Lender even though it did not expect to receive its Equivalent Collateral back, which would prejudice its ability to effect a mini close-out and set off its obligation to deliver Equivalent Securities against that Collateral return.

It's kind of weird, loosey goosey language:

“If I think you're bust and I don't want to pay, I don't have to, unless I couldn't pay or didn't want to pay, in which case I have to pay.”

Consult the circular logicians to pick your way out of that one.
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See also

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References